Monthly Archives: October 2014

After a week that left investors wondering what’s next – much like fishermen on a lake as the wind kicks up and the water gets choppy – the wind settled and the fish started biting. U.S. stock markets posted their best weekly returns in almost two years last week. When all was said and done, investors were $900 billion richer on paper, according to experts cited by Barron’s.

One of the most interesting things about the week was that little changed. The Eurozone’s precarious economic state did not stabilize. The Middle East remained in an uproar. The Russia-Ukraine conflict persisted, complete with sanctions. Ebola continued to be a threat, although vaccines are in the works. The pace of growth in China did not accelerate. In fact, a working paper published by the National Bureau of Economic Research suggested:

“There are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth.”

Some things related to China changed last week, though. It launched a new infrastructure bank along with 20 other countries, including India. The bank is intended to complement or rival the World Bank, depending on whose rhetoric you believe.

So, why did markets bounce? Barron’s said it had a lot to do with the Federal Reserve. As monetary policy has become less easy and volatility has picked up, “turbulence was in the direction of deflation, with commodities – especially crude oil – sliding and government bond yields plunging further around the globe.” Enter St. Louis Fed President James Bullard who suggested quantitative easing could be extended, if economic data supported it.

In other words, weak inflation numbers could shape Fed policy and delay interest rate increases. That was the story the numbers on the Chicago Mercantile Exchange told, anyway. The probability of the Fed raising rates by September 2015 declined sharply last week, moving from 81 percent to 42 percent. The market’s strong positive response has been dubbed the ‘Bullard Bounce.’

Data as of 10/24/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

4.1%

6.3%

12.1%

16.1%

12.7%

6.0%

10-year Treasury Note (Yield Only)

2.3

NA

2.5

2.2

3.5

4.0

Gold (per ounce)

-0.1

2.6

-8.3

-9.3

3.2

11.1

Bloomberg Commodity Index

-0.7

-7.3

-8.3

-7.6

-2.9

-3.0

DJ Equity All REIT Total Return Index

3.2

21.2

13.8

15.5

17.8

8.9

S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

fourth place! When it comes to financial literacy, the International Financial Literacy Barometer indicates the United States ranks fourth out of 28 countries. If you’re thinking those sophisticated Europeans must have an edge on us, you’re wrong. The top five countries were Brazil, Mexico, Australia, United States, and Canada.

The rankings were determined by the answers to five questions:

Do you have and follow a household budget? The best budgeters were in Brazil, Japan, Australia, South Africa, and Canada. The United States placed sixth.

How many months worth of savings do you have set aside for an emergency? The best savers were in China, Taiwan, Hong Kong, Japan, and Canada. The United States placed seventh.

How often do you talk to your children ages 5-17 about money management issues? Parents who talked most frequently about money with their children were in Mexico, Brazil, Serbia, Bosnia, and Lebanon. The United States placed sixth.

To what extent would you say teenagers and young adults in your country understand money management basics and are adequately prepared to manage their own money? More adults in Vietnam, Indonesia, India, Colombia, and Mexico believed kids understood financial basics than in other countries. The United States placed 27th.

At what age do you think governments should require schools to teach financial literacy to children so they can better understand money management issues? People in Brazil, Morocco, Thailand, Belarus, and Egypt wanted to talk with kids about money at the earliest ages. Americans said the government should require children to learn about money at about age 12. That put us in 21st place.

It’s remarkable we placed fourth when our ranking on individual questions was lower in every instance. Our final ranking was higher, in part, because the first three questions were weighted more heavily than the latter two.

If you’re interested in educating your children about money, a good place to start (with younger children) may be with the Tooth Fairy. In 2014, the Tooth Fairy left 8 percent less, on average, under kids’ pillows than in 2013. American children received about $3.40 per tooth. Ask your children why that might be? Are kids losing more teeth so the Fairy is paying less? Did the Fairy budget badly? Are some teeth worth more than others (cavities versus no cavities)? It’s always easier to learn when you’re interested in the subject!

Weekly Focus – Think About It

“Age is an issue of mind over matter. If you don’t mind, it doesn’t matter.”

—Mark Twain, American author

Best regards,

John Raudat, AIF, CFS, PPC

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

It’s a little early for Halloween, but markets sure got spooked last week. After a 21-month ride to mid-September highs, stock markets jolted and shook investors last week like the most dramatic and scream-inducing rollercoaster at an amusement park’s fright night. Barron’s described it like this:

“The Dow Jones Industrial Average endured dizzying swings each day, with a 460-point move midday on Wednesday. That’s when the market came closest to hitting a correction phase – that is, down 10 percent from the highs. The Standard & Poor’s 500 index fell to 1,820.66, or down 9.5 percent intraday from the all-time closing high of 2011.36, before closing on Wednesday down 7.4 percent from highs.”

Despite the wild ride, by Friday’s close, major U.S stock indices were down about 1 percent for the week.

Restoring some perspective

After a week like last week, it’s important to take a deep breath and cast a calm eye over current financial and economic circumstances. This can help restore perspective and ensure sound decision-making. Here are a few points to consider:

Markets go through corrections: Last week’s drop didn’t quite meet the definition of a market correction, but it came close. It’s no secret stock market corrections can be unnerving but, as Kiplinger’s explained recently, “Corrections are an inevitable part of investing. Since 1932, declines of 10 percent to 20 percent (the traditional definition of a correction) have occurred an average of every two years, according to InvesTech Research.” Based on history, 10 percent corrections are normal and to be expected. It has been three years since our last correction.

There is a lot happening in the world: ‘When it rains, it pours,’ as they say. A whole host of factors contributed to last week’s market volatility. Let’s take a brief look at some prominent concerns:

Monetary policy adjustments in the United States. The Federal Reserve has been moving away from the highly accommodative monetary policies it has pursued in recent years and that has some investors worried. Quantitative easing is expected to end this month. The next step is raising the Fed funds rate which is expected to happen next year. Last week, St. Louis Fed President James Bullard reassured markets when he suggested, “The central bank should extend its asset-purchase program when policy makers meet later this month. U.S. stocks erased losses and Treasury yields rose on expectations the Fed will take action to insulate the United States from global economic weakness,” reported Bloomberg.

Possible deflation in the Eurozone. It’s not here yet, but some Eurozone countries have fallen back into recession and the region is showing no growth. The European Central Bank reduced rates in June and September and is expected to begin a round of bond buying next week. These efforts may improve productivity and spur growth.

The strengthening U.S. dollarcould affect global liquidity. While a strong dollar has potential to slow growth in emerging countries, liquidity issues may be balanced out by the effect of falling oil prices. Reuters reported, “The falling oil price… will improve household budgets in the United States hugely – one study from Citi estimates the global windfall so far at $660 billion which includes a $600 per-household bonus in the United States.” More money in the pockets of U.S. consumers may translate into stronger emerging market economies.

Slowing overseas economic growth. Slower growth in China is affecting markets around the world. Germany has experienced some economic weakness recently. Brazil is in recession. U.S. economic growth is slow but steady and is not expected to change.

The potential spread of Ebola. “This is a terrible human tragedy but Ebola’s transmission – through bodily fluids – appears to be more difficult than SARS… The cost will be high in human terms but, so far, there is nothing to suggest it won’t eventually be contained,” reported Barron’s.

Political unrest and military conflicts persist. Ukraine, the Middle East, Hong Kong, and other regions of the world are embroiled in conflict. Unrest often impedes economic growth.

When you add to the mix human emotion and anxiety that has lingered since the financial crisis, you create the potential for a week like the one we just had.

Growth is healthy in the United States: Despite last week’s market volatility, U.S. stock market fundamentals haven’t changed. Barron’s said:

“Fundamentally, the market is fairly valued, but not overvalued, and the economic backdrop remains healthy. The U.S. economy looks to be growing at a healthy pace – 4.6 percent in the second quarter and an estimated 3 percent in the third. Third-quarter earnings are expected to rise 5.1 percent year-to-year, according to FactSet. Employment and manufacturing growth reaffirm the trend and, while retail sales slipped 0.3 percent in September, falling gasoline prices have boosted consumer confidence.”

Barron’s also pointed out that, at Thursday’s close, 35 percent of the companies in the Standard & Poor’s 500 had dividend yields that were higher than the 2 percent yield on 10-year U.S. Treasuries. The point being, market downturns often create opportunities.

Accommodative monetary policy has suppressed volatility: The Fed’s policies have kept market volatility lower in recent years than it might have been otherwise. If you think back, you may remember the Chicago Board Options Exchange’s Volatility Index (VIX), also known as Wall Street’s fear gauge, was at extraordinarily low levels this year. It moved from 12 to 26 during the past month. The historical average for the VIX is 20, and it reached 80 during the financial crisis. We need to get used to the idea that markets are likely to be more volatile as monetary policy normalizes, according to experts cited by Barron’s. The thing to remember is market fluctuations are not unusual. They may make us uncomfortable, but they should be expected.

Maintaining a disciplined approach

As you know, we have a disciplined investment process that was designed to help you work toward your financial goals. While we monitor economic and market developments closely, we don’t let the noise of day-to-day events determine our actions. We will not take action until our process indicates we should. It’s important for you to understand we make decisions about your account all the time, and much of the time we decide to do nothing. Although no strategy is assured success or protection against loss, we have confidence in our process. It is the reason we sleep well at night.

Data as of 10/17/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-1.0%

2.1%

8.9%

16.3%

11.4%

5.4%

10-year Treasury Note (Yield Only)

2.2

NA

2.6

2.2

3.4

4.1

Gold (per ounce)

1.3

2.7

-6.4

-9.8

3.3

11.4

Bloomberg Commodity Index

-0.6

-6.6

-9.1

-7.2

-3.0

-2.5

DJ Equity All REIT Total Return Index

1.6

17.4

10.8

17.6

16.6

8.4

S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

Weekly Focus – Think About It

“Wealth is the ability to fully experience life.”

–Henry David Thoreau, American author

Best regards,

John Raudat, AIF, CFS, PPC

P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.

* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.